The VAT affairs of intermediaries may seem straightforward, with the sole challenge being the determination of the correct VAT liability of their agency services. The reality is that, in many instances, nothing could be further from the truth.
Take the case of an agent who could be inadvertently seen as a principal in a supply chain of goods or other services; determining whether its intermediary supplies are taxable or not is the least of their concerns. But it has led to frequent disputes between VAT-registered businesses and HMRC, where the tax authority argues that the agent is not really an agent and should also account for VAT on the full value of the supplies intermediated.
The most recent of these litigations – Tapi Carpets Limited versus HMRC – is a legal case debated in the first-tier tribunal (FTT) that any party who believes they are a disclosed agent should familiarise themselves with.
Tapi is a supplier of floor coverings such as carpets and offers its customers the option to purchase a fitting service for a specified fee. Should a customer engage Tapi for the provision of this service, the company finds an independent fitter from a pool of vetted fitters – which are often not registered for VAT – to perform the fitting of the floor covering bought from Tapi.
This divergence of opinions resulted in over £13.5m of VAT assessed by HMRC
The company believed that it only needed to charge VAT on its products and, as a disclosed agent, on the arrangement services. HMRC, however, argued that Tapi also acted in a principal capacity with regards to the actual fitting services, by way of buying those services from third-party fitters and reselling them to its customers.
This divergence of opinions on the role played by Tapi resulted in over £13.5m of VAT assessed by HMRC on the alleged resupply of fitting services between 2019 and 2023.
However, the FTT ruled in favour of Tapi on the basis that the nature of the contractual terms between the company and its counterparts was typical of an agency relationship, and the contractual position was ‘consistent with the economic and commercial reality of the arrangements’.
The FTT noted that that the third-party fitters ‘were liable for the service provided to the customers, and the customers were liable to pay the fitters the fitting fee’.
It is important to have clear and detailed terms and conditions
It therefore concluded that Tapi was simply involved with the arrangement service, while the fitters separately supplied the fitting service directly to the customers and Tapi was not required to account for VAT on the latter.
Important lessons
The conclusions of the FTT here, although not legally binding precedents, highlight some important lessons that all those parties acting or believing to act as agents and not as principals – whether they are retailers or platform operators – should consider carefully.
Firstly, it is important to have clear and detailed terms and conditions, which should unequivocally explain that any agent is meant solely to facilitate a transaction or supply between two other parties.
Secondly, and perhaps most importantly, the commercial reality must follow what the terms and conditions say, and reflect both the independence of the intermediary from the other two parties and a minimal involvement in the supply between them. To this extent, ensuring, for example, that any payment for such supplies does not involve the agent can support the view that the agent is not a party in the transaction intermediated.
Clarity over commercial reality
The prevailing importance of the commercial reality over any contractual terms was also a major factor in another ‘agent versus principal’ landmark ruling by the FTT – All Answers Ltd v HMRC – litigated in 2023.
In this case, the FTT sided with the tax authority, as it found that the legal obligations between the end customers and the third-party suppliers in the provision of academic work were actually placed on All Answers, despite the fact that the contractual terms between the appellant and its counterparts may have been designed to suggest otherwise.
This led the FTT to conclude that All Answers was a principal and not an intermediary, and ultimately liable to account for VAT on the services supplied to the final customers.
The key message is simple: the clearer the terms and conditions with intermediaries, the less likely a business will be hit with an unexpected VAT bill.
